It is not surprising that the Securities Appellate Tribunal (SAT) should set aside the 2019 disgorgement orders passed by SEBI (Securities Exchange Board of India) against National Stock Exchange (NSE) and its key officials in the co-location scam. In its order, SEBI had made out a case against NSE for displaying negligence and lack of due diligence in allowing some trading members (OPG Securities) unfair access to market data and its colocation facilities.

But SEBI’s order failed to find any substantive evidence of either fraud or collusion by NSE’s employees and was unable to quantify any wrongful gains made by players who exploited NSE’s weak protocols. SEBI’s disgorgement powers are specifically designed to recover illegal gains made by market players breaking securities laws. As SEBI failed to establish this, SAT has struck down the ₹625-crore disgorgement demand against NSE and its officials. It has instead directed NSE to pay a ₹100-crore penalty into SEBI’s investor protection fund. This is a very unsatisfactory denouement to the controversy that has loomed over India’s premier market institution for seven years. SEBI has some soul-searching to do on why its landmark orders have been over-turned by SAT at such high frequency in recent times. But with the evidence trail in the NSE saga likely to have gone cold, it would be pragmatic for SEBI and the government to bring the case to a close. It is time they focused on the future of this critical market institution which has been drifting without direction.

On the operations front, the NSE has undertaken technology upgrades to fix loopholes that gave rise to the colo scam in 2016. But then, SEBI has also unearthed instances of blatant mis-governance by NSE’s top executives which need to be prevented in future. After the colo controversy, NSE’s Board was reconstituted by inducting SEBI-appointed Public Interest Directors (PIDs). Its last two CEOs have been lateral hires. But stronger whistle-blower mechanisms and direct access for NSE’s PIDs and Chief Regulatory Officer to SEBI, may be needed to help flag irregularities at an early stage.

Governance experts have also suggested shorter tenures for top executives at MIIs to avoid concentration of power, with outgoing officials kept off Board roles. In November 2022, the Mahalingam committee submitted a detailed report suggesting many practical fixes. Its recommendations on the regulatory and compliance functions of exchanges being given primacy over business development, with separate leadership for each, the induction of more PIDs into Boards and documentation of Board meetings are worth implementing. This governance overhaul must be concluded soon, to clear the decks for NSE’s long-delayed listing on public markets through an IPO. It is time that NSE subjected to the same accountability that is demanded from the companies listed on its platform.